Inflation Targeting in India : An Interim Assessment
This paper provides an assessment of India’s inflation-targeting regime. It shows that the Reserve Bank of India is best characterized as a flexible inflation targeter: contrary to criticism, it does not neglect changes in the output gap when setti...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2020
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/480251601919547142/Inflation-Targeting-in-India-An-Interim-Assessment http://hdl.handle.net/10986/34593 |
| Summary: | This paper provides an assessment of
India’s inflation-targeting regime. It shows that the
Reserve Bank of India is best characterized as a flexible
inflation targeter: contrary to criticism, it does not
neglect changes in the output gap when setting policy rates.
The paper does not find that the Reserve Bank of India
became more hawkish following the transition to
inflation-targeting; to the contrary, adjusting for
inflation and the output gap, policy rates became lower, not
higher. Some evidence suggests that inflation has become
better anchored: increases in actual inflation do less to
excite inflation expectations, indicative of improved
anti-inflation credibility. The question is whether the
shift to inflation-targeting has enhanced the credibility of
monetary policy such that the Reserve Bank of India is in a
position to take extraordinary action in response to the
Covid-19 crisis. The paper argues that the rules and
understandings governing inflation-targeting regimes come
with escape clauses allowing central banks to shelve their
inflation targets temporarily, under specific circumstances
satisfied by the Covid-19 pandemic. The paper provides
evidence that inflation-targeting central banks were able to
respond more forcefully to the Covid-19 crisis, consistent
with the idea that inflation expectations were better
anchored, providing more policy room for maneuver. |
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